megaprojects are a rip-off

I’ve always known that some city projects are simply bad deals, like sport stadiums. What I didn’t know is that there is new research showing that maga-projects of all types are a giant rip-off. Bent Flyvberg of Oxford discusses this finding a new Econ Talk podcast. What Flyvberg did was collect data on “mega-projects” – construction efforts that cost at least a billion dollars and affects a million people. What was found is that 90% of the time, mega projects are over budget, not completed on time, or do not attract the customers that were predicted (i.e., the demand was wildly over estimated). This applies to both private and public sector projects. Flyvberg also reports that smaller projects tend to do much better, for a variety of reasons.

A few comments here:

This is pretty strong evidence that states should completely avoid the expensive mega-sports projects like stadiums above a certain size. The Olympics, for example, should only be hosted in nations that have preexisting facilities.

Flyvberg points out that mega projects can even destroy the engineers and other professionals who build them. The architect of the Sydney opera only did one building in his life. The cost-overruns and delays ruined his reputation.

It is mainly state actors, contractors, and land owners who receive benefits.

I recently saw the Church of the Sagrada Familia in Barcelona. Big project, but built little by little over a 100 years. A better model?

There are some cases of success, but they seem hard to predict ex-ante.

Bottom line: The next time they tell you that we need this multi-billion dollar road, just say no.

There was similar research about these deals governments make with corporations to bring jobs to their state. It is always a failure. Just based on numbers alone, governors ought to be making things simple for small businesses- because small to medium businesses, which can’t do this kind of location shopping, are who employ the most people in total in a state.

Unfortunately, governors enjoy the theater of getting up with some big CEO and telling the public they are bringing X number of jobs to the state.

This is no surprise. Public sector projects are motivated by politics. Economics aren’t even a secondary consideration. The projections of economic benefit are comprehensively fraudulent.

In the private sector, the motivations of the players are to make money. (Really. On a large private sector capital project, agents’ incentives are effectively perfectly aligned with those of the principal, the agents are effectively monitored, and the principals are effectively classical economic actors. Would make an interesting sociological study …)

In the public sector, you simply don’t know what the motivations are, and the motivations change from election to election and even from morning paper to morning paper. With the principal’s motivations murky and mutable, and monitoring difficult, agency issues are comprehensive. Anyone who’s worked on a public sector project will wax eloquent on the right hand not knowing what the left is doing.

Regulations for public sector contracting only make it worse. My wholly anecdatal [sic], seat-of-the-pants estimate is that FAR adds 25% to 50% to the bid cost of a public project in the US, and even more to the final cost. Leaving aside Davis-Bacon and policy requirements (affirmative action, minority contracting, …), anti-corruption and transparency regulations add to the cost of bidding – and, paradoxically, to the opportunity for corruption.

That’s also why it’s almost impossible to predict ex ante which public sector projects will be economic.

Privatization works, but only if it is true, full privatization. The problem with privatization in the US is that the stakeholders (management, labor, suppliers, customers, contractors) in the municipal incumbent have political clout (it’s how they got to be stakeholders) to ensure that their interests get protected. Consequently, a private sector bidder is constrained by the same political motivations as the municipal incumbent. Privatization is a success only where there is political will to break the clout of the incumbent stakeholders. That only happens if Margaret Thatcher is in charge or if things are so badly broken that the consumers are willing to demand real change.

But economic profit is not necessarily the primary reason to host one of these events. Another reason could be symbolic and relate to the country’s (or city’s) relative global standing. Something Nina Bandelj and Fred Wherry call the “cultural wealth of nations”

Sydney Opera House is a curious case to highlight. It may have harmed Jorn Utzon’s reputation in the short-term but he was subsequently a recipient of the Pritzker Prize, and practically every other prize and is a noted architect of the 20th century. The Opera House itself is now listed as a World Heritage Site. Who remembers the delays and budgets today?